‘Pass tax reform as buffer vs protectionism’

The Department of Finance (DoF) on Monday called for an early passage by Congress of the proposed Comprehensive Tax Reform Program (CTRP) to create a strong buffer against the resurgence of protectionism around the world.

Speaking at the resumption of the tax reform hearing conducted by the House ways and means committee, Finance Secretary Carlos Dominguez 3rd said the Philippines is likely to see volatility and risk-aversion among many of its trading partners given the uncertainty created by resurgent protectionism in the world economy.

Slowing global trade translates into weaker global growth, he warned. Thus, he said, the Philippines should seize the “Cinderella moment” it now enjoys to quickly move the fiscal reform package and create a buffer for the most vulnerable among the people, referring to the country’s brisk economic growth.

“Our mandate is to take the more challenging path. Building on solid fundamentals, we must immediately bring relief to all Filipinos burdened with oppressive tax rates. At the same time, we must raise enough revenue to close the infrastructure gap that makes production costlier for our economy than in others in this region, as well as enough revenue to close the education and health gaps and provide the social protection needed by our poor and vulnerable,” he added.

He also warned that unless the tax reform bill endorsed by the DoF is passed soon enough, millions of the country’s “hardcore poor, those with no skills and no opportunities,” will remain trapped in the vicious cycle of poverty for years to come.

Critical juncture
“We are at a critical juncture today. The easier path is to continue with existing policies that might bring high growth but will also sadly maintain high poverty and economic exclusion. The more challenging path is to reform the fiscal and economic policies so that growth happens with equity,” he said.

To attain the goal, Dominguez explained that the government needs to undertake a tax reform program that will enable it to raise an additional P718 billion for education, P139 billion for health, P267 billion for social protection, welfare, and employment, and P1.73 trillion for urban and rural infrastructure.

“By failing to act boldly at a most opportune moment, we will betray our people. We will condemn our nation to the vicious cycle of high inflation, high interest rates and inhospitable business conditions that we endured before,” he said.

“Without the tax reform package, our GDP growth cannot be sustained by at least 7 percent. Without a dramatic increase in investments, the country will be consigned to growth below 6 percent—a purgatory for an emerging economy with great potential.

“Our economic simulation studies validate this,” he said.

High taxes unsustainable
Dominguez explained: “We can no longer maintain high income tax rates. Our people expect relief from them. We cannot attract the investments we need until we bring our tax rates to the regional average. To compensate for lower rates, we intend to broaden the tax base and introduce new revenue measures. The entire package needs to be passed to ensure gains in revenues to fund the President’s 10-point socioeconomic agenda and maintain our strong macroeconomic fundamentals.”

“We must be fiscally prepared to invest more heavily in our human capital and in much needed infrastructure,” he said.

The DoF secretary painted a dire scenario if the Congress would choose to pass only the tax package’s popular component, which is the reduction in personal income tax (PIT) rates without the corresponding revenue-enhancing measures.

He said without improving government revenues, “many of our children will continue walking hours to get to school and our classrooms will continue to be packed beyond capacity. The poorest Filipinos will continue to have little or no access to health services. Our farmers will be unable to raise their productivity and thus remain poor.”

Along with this bleak scenario, he said, the Philippines will most possibly suffer a credit rating downgrade as the government will be forced to rely on borrowings to manage the deficit, which means P30 billion in additional debt costs; consumers will have to absorb the consequences by having to cope with a permanent P2-depreciation of the local currency against the dollar, along with a two-percent increase in interest rates; and public funds for classrooms, health centers and rural roads will be in short supply.”

“If we fail to pass the revenue enhancement measures, we will lose the growth momentum that took us years to build. We will face the specter of large budget deficits and move closer to a debt crisis,” he said.

Dominguez likewise noted that without the tax reform package, growth will not only be slower but exclusive, with the rich continuing to corner the wealth created and the poor kept out of the national economic mainstream.

Adopted into House Bill 4774, the CTRP’s first package aims to make the tax system more progressive by lowering PIT rates to make these on the par with those of other economies in the region, expanding the value-added tax (VAT) base but retaining exemptions for seniors and persons with disabilities, and adjusting the excise taxes on oil and automobiles, among other measures.

In particular, Dominguez assured the House committee that most cars “will still be affordable” under the CTRP.
The “more expensive cars will be charged higher excise taxes to ensure progressivity. When taken as part of the package, most cars will still be affordable,” he added.